CRR hike: Avoid interest-rate sensitive sectors

(A CNBC-TV18 exclusive to domain-b)

The war against inflation has turned brutal, or so it seems. After market hours on Tuesday evening, the Reserve Bank of India stepped in for the second time in two months, with the most potent monetary policy tool at its disposal; it hiked the cash reserve ratio by 50 basis points.

This is expected to suck out close to Rs14,000 crore from the system. The RBI has taken this decision in view of what it calls the "paramount need to contain inflation".

The CRR hike will weigh down heavily on the shoulders of the market and the banking space. Since the last CRR hike, public sector banks have been underperforming, and now with this hike, their under performance might get even more exaggerated.

Technical analyst Ashwani Gujral believes that interest-rate sensitive sectors will break down. He says, "I would be keeping away from PSU banks, realty, autos, metals and construction stocks where home loans or auto loans could be the play."

From the market perspective, while bank stocks will see a sell-off, real estate stocks will go through a battering because interest rates will go up even more and people will start worrying about what happens to the real estate sector. Though the sector showed some signs of stability yesterday but it is expected to get a whack once again today.

These are the two areas to watch out for. However, with every successive rate hike, the whole credit growth paradigm is now shifting down. While growth paradigm needs to be re-looked at, housing loans, consumer loans, and all interest rate sensitive sectors will have to be re-looked at once again.

Gujral is of the opinion that one should stay away from public sector banks. "They would clearly under perform as there is no reason to be long in them. On most rallies, you need to be out of the public sector banks. Their cycle probably has reversed in a declining interest rate environment. These stocks tend to do very well but now with interest rate pressure on this would be a sector, which would under perform."

However, Jai Prakash Sinha of Ambit Capital believes that one should consider this to be an opportunity to enter the banking universe. He says, "I think I will look at it as an opportunity because if you look at some of the large banks, they are down three-four per cent. Yes, in the short-term they are going to make some amount of opportunity losses and then they have enough measures to back the same, so I would look at it as an opportunity to enter the banking space.

In accordance with CRR hike, Adrian Mowat, chief Asian and emerging equity strategist at J P Morgan says that CRR hike has the potential to significantly dent equity markets.

"People are going to be anxious about the thematic sectors whether that be construction building material, to some extent public sector banks, which we think will see some problems as interest rates have moved higher."

Moreover, Mowat suggests that one should be cautious on smaller mid caps and only look at blue chips. He says, "We would be recommending clients to focus on big blue chips. Be quite cautious about smaller midcaps, they tend to be the areas that suffer the most when interest rates are rising. So our advice is to buy stocks which on the margin should get market share gains as interest rates go up.

He feels that one should also look at the IT companies. He comments, "IT companies will benefit if this event causes a weaker rupee as they tend to be very cash rich and so are less concerned about rising interest rates.